Wednesday, May 31, 2006

From the class room to the crass room.

From Harvard to Las Vegas

Prof. Gary Loveman left the ivory tower to run a casino. Now the Harrah's CEO heads up the world's largest gaming empire.

By Daniel McGinn
Newsweek

April 18 issue - If you fly into the Las Vegas airport, grab a cab and ask the driver to take you to the town's most fabulous casino, you might arrive at the door of Mandalay Bay, which has a giant shark aquarium, the best pool and classy restaurants like Aureole. Or maybe you'll wind up throwing dice at the Palms, where Paris Hilton and Britney Spears party regularly. But the odds are surely slim that you'll find yourself at Harrah's, a slender and unimaginative casino-hotel, whose 2,530 rooms haven't changed much since its days in the 1970s as a Holiday Inn. Harrah's is strictly a midmarket gambling parlor, more apt to lure in gamblers who—lose perhaps $200 an evening than the high rollers who bet thousands per hand. Yet where casino aficionados see an appalling lack of style, Wall Street sees a lot to love. For, despite its lack of trimming and trappings, Harrah's management team has turned the company into a profit machine.

Credit for that goes to Gary Loveman, an MIT-trained economist who's emerged as the gaming industry's unlikeliest high roller. Loveman, 44, spent four years at Harvard Business School teaching M.B.A. students how service companies like Wal-Mart and Taco Bell boost profits. Much of his work focused on a seemingly simple lesson: that businesses need to identify their most profitable customers and get them to shop more often. To test his theories for how to do that, in 1998 he left Harvard to become chief operating officer at Harrah's, the Las Vegas-based casino company. In 2003 he became CEO. Since arriving in Las Vegas, he's lured mathematicians and computer jocks to help him create a high-tech marketing program that tries to perfectly match the perks they offer frequent gamblers with those customers' idealized preferences. Their efforts are paying off: last year alone Harrah's stock jumped by one third.

And now Loveman is placing his biggest bet yet. Last July he agreed to buy rival Caesars for $9.4 billion. Approved by shareholders last month, the deal will make Harrah's the world's largest gaming empire, with $8.75 billion in combined revenue last year, ahead of MGM Mirage, which is acquiring Mandalay; those two grossed a combined $6.72 billion in 2004.

Harrah's journey in the gambling industry is an unlikely ascent. The company's roots lie in Reno, Nev., where founder Bill Harrah opened a bingo parlor in 1937. The company didn't enter Las Vegas until the 1980s, and throughout the '90s Harrah's remained an incongruous sprawl. Much of its profits flowed not from Las Vegas but from a network of shopworn casinos and riverboats in places like Illinois, Indiana, Mississippi and Louisiana. In 1999 the company bought the Rio on the Vegas Strip, which is closer to the modern Sin City ideal: a rainbow-colored, V-shaped tower of suites. Still, its limited Vegas presence made Harrah's a lesser player compared with rivals opening lavish new properties like the Venetian and Bellagio.

Lacking the hippest venues, Loveman had to find alternative ways to boost sales. The key has been a loyalty program he created called Total Rewards. It replaced the old Vegas system of doling out freebies—drinks, meal coupons, comped rooms—to gamblers based on managers' guesstimates of who's betting enough to deserve them. Loveman's coldly calculating computerized system uses magnetic cards that gamblers insert into slot machines to track their play, allowing them to pile up points toward those perks.


The system goes far beyond the simplicity of a frequent-flier program. Through surveys and by tracking purchases, Harrah's strives to predict exactly what its loyal gamblers may want: a free steak dinner, spa treatments or tickets to a show. Harrah's then uses this information to design customized offers—delivered by mail, phone or e-mail—to lure gamblers in more frequently. It also uses the data for tailored pricing: customers pay widely varied rates for hotel rooms, for instance, based on how much they're likely to lose in the casinos. "We're going to keep offering you things and asking you and talking with you... [until] we get to the point where we know what you want," Loveman says.

One B-school professor compares the rigor of Harrah's marketing efforts to epidemiologists who use clinical trials to test the efficacy of drugs. Indeed, analysts say Total Rewards is the most innovative marketing effort in gaming, but it's also been recognized as among the most advanced examples of "customer-relationship management" in any industry. "Gary has taken a business everybody thought was kind of touch-and-feel and made it into a scientific business," says Sergio Zyman, the former Coca-Cola branding guru. "They understand precisely what is going on with customers, how to motivate them and how to sell them more."

Until recently, Loveman touted another advantage in selling them more: geography. While competitors focused on building ever-better Las Vegas properties, he argued that Harrah's far-flung array of regional casinos offered better access to folks who wanted to play close to home. But by 2003, as Las Vegas rebounded from the post-9/11 travel slump and rivals' opulent new gaming palaces lured visitors, Harrah's lackluster Vegas venues became a problem. "We knew we needed to get bigger in Vegas, and rather quickly," Loveman says. Harrah's considered building new casinos there, but that would be slow and costly.

Then Caesars called. The higher-end gaming company, which owns Caesars Palace, Bally's and Paris, has been poorly managed and profit-challenged for years, analysts say. Wall Street applauded Loveman's decision to buy it. "What Harrah's has done historically is identify low-hanging fruit—companies that have been underperforming," says J.P. Morgan analyst Harry Curtis. The deal gives Harrah's the higher-end Vegas casinos it needs—and adds 10 million customers to its marketing database. Loveman envisions customers shuttling between his portfolio of properties, much as visitors do at Disney World. Though some industry watchers have knocked the deal as a departure from Harrah's old strategy, Loveman says that it makes perfect sense. "We're going to work really hard to make sure most of your business in the city is with us," he says. Last year Harrah's earned $367.7 million, and Mark Greenberg, manager of the AIM Leisure Fund and a large shareholder, expects more double-digit profit growth.

Even as the CEO of the industry's biggest player, Loveman's ideas—and his academic pedigree—make him a bit of an outsider. Rivals complain he wants to "commoditize" gambling by expanding too far beyond Las Vegas and Atlantic City. "Harrah's has never met a community they didn't think was appropriate for a casino," says University of Nevada, Las Vegas, professor Bill Thompson, author of "Gambling in America." Loveman doesn't even live in Las Vegas—his family's still back in Boston, and the CEO lives in a hotel during the workweek. The commute is worth it: Harrah's paid him $3.5 million last year.


For his part, Loveman is unfazed by the criticism. His biggest annoyance is that politicians, regulators and even some rivals treat gambling as such a unique business in need of such close regulation. "We're constantly having to overcome all these myths," he says, citing allegations of mob influence or that many customers are gambling addicts. In contrast, Loveman portrays gambling as a recreational activity not unlike watching a movie, in which the suspense of finding out if you win or not creates pleasing emotions, much like the suspense of watching "Survivor" or the Academy Awards. Instead of an admissions fee, he says, you pay for the fun via lost wagers. Never much of a gambler himself before he joined the company, he plays a little blackjack nowadays.

He hopes the old biases against his business fade as he brings in more outsiders, who'll run the casinos the way they'd run any other enterprise. When he recently searched for an executive to oversee Harrah's slots operations—which deliver 80 percent of profits—Loveman didn't even consider casino-industry veterans. Instead, he hired an executive from The Limited whose last job was running the Victoria's Secret Web site. Slot machines may not have obvious parallels with skimpy lingerie, but Loveman figures a smart outsider can find ways to get his customers' hearts pumping, too. Stanford professor Jeffrey Pfeffer, who's written a case study on Loveman's career transition, says it illustrates how professional skills can be transferable in ways that are difficult to anticipate. "He's extremely good at asking questions inside of Harrah's that get people to think about things in new and different ways," Pfeffer says. "That's what a professor does." And for an industry that's long been obsessed with creating the splashiest new venues, Professor Loveman's most important lesson is that with smart marketing, less-fabulous casinos can sometimes turn shareholders into big winners.

With Steve Friess in Las Vegas


© 2006 MSNBC.com

URL: http://www.msnbc.msn.com/id/7433764/site/newsweek/

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